Each business day HedgeCo.Net keeps you informed with the top hedge fund industry news, opinion and insight from around the globe. From the latest hedge fund launches, to the impact of regulation, competition, and investor activism - we track the topics and people that make a difference to you.
New York (HedgeCo.net) – Broker dealer BTIG LLC, has expanded its Capital Introduction team with the addition of Jennifer Bloom and Catherine Wagner as Vice Presidents to help drive the firm’s services to its Prime Brokerage and Outsource Trading clients.
The Capital Introduction team, which is led by Peter Tarrant, Managing Director and Head of Business Development at BTIG, works with a wide range of managers and has a particular expertise in new and emerging hedge fund managers. Through the firm’s network and existing client base of over 1,200 institutional clients, the Capital Introduction team looks to provide clients with effective and targeted introductions.
“Our ability to offer our Prime Brokerage and Outsource Trading clients an enhanced capital introduction team is an important move in BTIG’s strategic growth plan,” said Justin Press, Managing Director and Co-Head of Prime Brokerage at BTIG. “We are a client-led business and strive to provide added value at every stage of the client’s relationship with us.”
Ms. Bloom joins BTIG from Credit Suisse’s Private Fund Group where she was an Analyst. Prior to Credit Suisse, she was with Merrill Lynch’s Real Estate Investment Banking team. Ms. Bloom is responsible for capital introduction on the East Coast and across Europe. She is a graduate of Yale University.
Ms. Wagner joins BTIG from UBS where she was an Associate Director in the Prime Brokerage Sales team. Prior to UBS, she was an Investment Analyst for FirstWorthing. At BTIG, Ms. Wagner is responsible for delivering capital introduction coverage for the Western United States region. She is a graduate of The University of Texas at Austin.
“Our strong network of senior level executives across the hedge fund industry and with institutional investors means that we can provide our clients with the most appropriate, high quality introductions to help further their growth,” added Tarrant.
New York (HedgeCo.net) – At a seminar held yesterday, Starting A Hedge Fund In The Post-Madoff Era, organized by Andrew Schneider and Hedgeco Networks, 220 managers, investors and service providers came together at the U.S. Trust Building to hear Joe Goldstein, Ron Geffner, Ron Suber, Merlin Securities and others discuss the future of startups in the hedge fund industry.
“As a presenter I was very happy to see many start up funds in the audience as well as investors and service providers.” Joe Goldstein from G&S Fund Services said, “I think it was a good environment for someone looking for the right information to plan and succeed in establishing a a start up hedge fund. It is typical that in post-Madoff period fund managers embrace the importance of a good infrastructure in gaining investor confidence and building a good fund.”
After the speeches were drinks and networking, where the guest speakers mingled with investors. The general feeling among attendees was the the importance of knowing top of the line service providers, ones that stand out and have a prominent reputation.
“After the collapse of Bernie Madoff’s ponzi scheme, hedge fund infrastructure has come to the forefront in the industry.” Andrew Schneider, founder and co-principal of HedgeCo Networks said, “Investors are performing in-depth due diligence and looking for robust infrastructure before committing their capital. This is especially true for new hedge funds. Potential investors are relying heavily on the reputations of a hedge fund service providers including third-party administrators, auditing firms, prime brokerage houses, and legal counsel to prevent fraud and massive failures like never before.”
New York (HedgeCo.net) – Hedge fund prime brokers, Northern Trust and Merlin Securities, have set up an agreement which enhances Merlin’s existing broker-dealer custody relationships with Goldman Sachs Execution and Clearing and J.P. Morgan Clearing Corp. Merlin’s clients now have easy access to all three providers through Merlin’s award-winning multi-prime reporting platform.
“In today’s market, managers and investors are seeking custodial solutions that reduce their counterparty risk and provide fully integrated, multi-custodian reporting analytics and risk data,” said Stephan Vermut, Founder and Managing Partner of Merlin. “Our agreement with Northern Trust addresses this need for our clients and grants seamless access to a bank custody provider with an unparalleled reputation for quality, safety and stability.”
“Northern Trust is delighted to add Merlin and its clients to our growing hedge fund custody and administration business – which now provides asset servicing for more than $90 billion in assets worldwide,” said Peter Cherecwich , Chief Operating Officer for Corporate and Institutional Services at Northern Trust. “Merlin’s technology, risk analytics, and multi-custody reporting capabilities are a strong complement to Northern Trust’s hedge fund services.”
As of June 30, 2009 , Northern Trust had assets under custody of $3.2 trillion, and assets under investment management of $558.9 billion.
Merlin Securities has offices in New York and San Francisco and is a member of FINRA and SIPC. Recognized as the #1 prime broker for funds less than $1 billion by Alpha magazine’s 2008 hedge fund service provider survey for the second year running Merlin was the top-ranked non-algorithmic-driven firm and second overall among brokerages trading NYSE stocks as measured by arrival price, according to the 2008 Elkins/McSherry annual transaction cost survey.
Alex Akesson
Editor for HedgeCo.net alex@hedgeco.net HedgeCo.Net is a premier hedge fund database and community for qualified and accredited investors only. Membership on www.hedgeco.net is FREE and EASY. We also offer FREE LISTINGS for Hedge Funds!
New York (HedgeCo.net) – The GlobeOp seminar drew a capacity audience of hedge fund investors and managers, representing approximately $260 billion in assets under management, in New York City over the weekend.
Speakers representing Lighthouse Investment Partners, Lyxor Asset Management, Waterstone Capital Management, Bracewell & Giuliani, Newedge Group and GlobeOp offered insights on hedge fund manager selection, legal requirements, middle-back office services, controls and monitoring.
Excepts from the presentations include:
Sean McGould, president and co-chief investment officer, Lighthouse Partners “We transitioned to managed accounts over the last five years for the added benefits of transparency, flexibility, and control. Full transparency allows for a deeper focus than has traditionally been the case, especially during the manager selection process. For prospective managers, there are three primary considerations. First, does the manager offer real diversification or do they merely compound existing risks? This can only be accurately measured by layering a prospect’s daily position level data into the portfolio and conducting a deep statistical analysis. Second, is the portfolio highly correlated to the most widely held names or other dominant themes within the hedge fund universe? Having the ability to confirm the uniqueness of a prospect’s portfolio is of great benefit and increases the level of overall diversification. Finally, if the manager meets these tests, is there a willingness to commit the resources necessary to make a managed account feasible and the on-boarding process as seamless as possible? …Flexibility is key to remaining opportunistic and taking advantage of market dislocations. …The benefit of control speaks for itself after a year like 2008.
Nathanael Benzaken, managing director, Lyxor Asset Management “The two main risks for investors are market risk and operations risk – one to manage and the other to mitigate… The challenge with transparency is how to exploit it. To understand risk, investors need robust software, experienced risk managers, and an appropriate risk methodology. Only scenario and stress test models can help assess tail risk in dislocated markets. VaR is not appropriate, unless perhaps for manager-level portfolio construction… The managed account’s segregation facilitates operational risk management. This is the most important risk to eliminate because it creates a short put equivalent position for investors – it’s the ‘dark side’…. All managed accounts and platforms are not equal. Some are ‘Madoff-able;’ some are ‘Amaranth-able.’ For full transparency and to identify risk and/or style drift early, in-depth and regular due diligence should be done on the underlying managers, the platform structure and infrastructure – at inception and throughout the life of the relationships.
Risk monitoring is nothing, what really matters is risk management. The goal is not to second- guess or intervene in portfolio management, but to understand and take clear action when it’s necessary – for instance in the case of mitigating counterparty risk or when confidence in the manager is lost (e.g. breach of mandate).”
Martin Kalish, chief operating officer, chief financial officer, Waterstone Capital Management “Managed accounts are not for everyone – does it fit your business plan? The manager seeks a long-term investor; the investor requires assurance of the manager’s experience in running a managed account. Consider whether the investor will understand and be responsible for the portfolio information they receive — is more support time needed than for other fund investors? …The mandate is also key – its definitions can significantly impact asset allocation, concentrations, leverage, liquidity, operations and risk management compared to the flagship fund.
Cost and resources also matter. Managed accounts are about data management. Operational systems are needed to create reporting transparency. Is there sufficient operational staff for trade allocation, valuation and settlement, portfolio accounting and programming? …It’s very difficult to run multiple funds without investing in technology. Trade allocations should be automated to mitigate manual intervention. … Investors also need resources to execute managed accounts – it requires two-three months, including the key challenges of the legal aspects and establishing prime broker accounts.”
John Brunjes, partner, Bracewell & Giuliani “The structure and terms an investor prefers in the managed account involve a fully-negotiated process. For the investment advisor, a managed account is a separate client under the Investment Advisors act. At the level of 15 clients, the advisor must become SEC-registered and operate in a registered environment – a new challenge for some. For the investor, the arrangement gives power of attorney to the manager to trade the account, subject to restrictions the investor defines. It is a fee-for-service arrangement as opposed to the two-and-twenty structure traditional in pooled capital. Many investors, in consultation with their managers, create a special purpose vehicle, usually a limited liability company. To avoid project execution risk, investors should ensure the manager has already strategically decided to undertake managed account arrangements and is prepared for what it entails.
The mandate or operating agreement defines the type of trading authorisations and restrictions governing the manager, including sector, concentrations or company specifics. As the direct owner of the securities, the investor also assumes liability and compliance responsibilities.
Investors increasingly specify independent administrators to provide checks and balances on managers, including asset and portfolio valuation, daily position and risk reporting, etc. The registered environment also stipulates administrative, infrastructure and reporting requirements. Independent involvement in providing transparency, checks and balances to various managed account components can offer more comfort to investors, which is why these vehicles are increasingly attractive.”
Cary Goldstein, associate director, Newedge USA, Prime Brokerage Group “A managed account platform will have more than one hedge fund manager trading for multiple vehicles, multiple prime broker relationships and a single administrator across all accounts. From a trading perspective, the most significant implication for each fund manager is the need for a trade allocation process to split trades appropriately between the managed accounts and the flagship fund. For liquid, listed instruments, this is fairly straight-forward. But it can be more complex for OTC and illiquid instruments – distinct trades may be needed for each managed account and flagship fund, with good monitoring to mitigate tracking errors… In a managed account, investors view the ability to control of the amount of leverage utilised to be an advantage.”
Vernon Barback, president, chief operating officer, GlobeOp Financial Services “Administration for managed accounts should focus on what the investor wants and needs. Best practice requires a very deep level of service. Helping the investor manage and mitigate risk across all portfolios is key; reducing overall operational risk is the greatest value-add. The investor should approach the administrator in a demanding and thoughtful manner, as a partner who helps to mitigate operational risks and provide transparency so the investor can ensure that the manager is adhering to the agreed investment principles.
Due diligence is not a “tick the box” exercise. Rather, it needs to be an ongoing and in-depth process. There are seven administration areas where an investor should conduct deep due diligence. Is technology a source of innovation and target of continuous investment? Are processes subject to a control environment and is real-time transparency accessible to investors and administrator management? Is domain experience and scale being developed in the human resource pool? Visit off-shore teams and operations to ensure they are integral and adding value to operations. Ask for a personal presentation of the SAS 70 to ensure it is a single document whose scope covers all services & controls the managed account requires, in all offices. Reconciliations should be run daily, with breaks corrected with the manager, and root causes should be investigated to prevent repetition. As the devil is in the detail of the security master, verify that customized risk reports can be run by the administration organization keeping the managed account’s books & records.”
Alex Akesson
Editing for HedgeCo.net alex@hedgeco.net HedgeCo.Net is a premier hedge fund database and community for qualified and accredited investors only. Membership on www.hedgeco.net is FREE and EASY. We also offer FREE LISTINGS for Hedge Funds!
New York (HedgeCo.Net) – Hedge fund pioneers Ellen C. Schubert and Ray J. Iler have joined the hedge fund team of Deloitte LLP’s Asset Management Services practice.
Schubert joined Deloitte in the newly-created role of Chief Advisor to the Asset Management Services practice and is based in New York. Prior to joining Deloitte, Schubert was a managing director and global head of the Fixed Income Hedge Fund Business for UBS Investment Bank from 2006 until 2008.
Iler rejoined Deloitte as the Northwest Pacific hedge fund leader and is based in San Francisco. From 2001 to 2006, he founded the tax practice and served as Audit Partner for Deloitte’s Grand Cayman practice.
The new hires are the latest in a series of strategic growth initiatives executed over the last 18 months by Cary Stier, Deloitte’s U.S. Head of Asset Management Services.
“Challenging times call for new ideas. The breadth of our practice offers us the perspective vital to designing new solutions that help clients prepare for the unforeseen. There has been too much surprise in the market, a trend that cannot continue,” Stier added.
Ten current Deloitte partners have been newly-dedicated to Deloitte’s hedge fund team, joining the global bench of talent in accounting and tax, valuation, anti-fraud, governance and oversight, regulatory and compliance, risk management, technology and operations, structuring, and third party administrator/prime brokerage relationships.
Alex Akesson
Editor for HedgeCo.net alex@hedgeco.net HedgeCo.Net is a premier hedge fund database and community for qualified and accredited investors only. Membership on www.hedgeco.net is FREE and EASY. We also offer FREE LISTINGS for Hedge Funds!
Bloomberg – JPMorgan Chase & Co., the second- biggest U.S. bank, created a group to help fund managers broaden their trading and assure investors that assets won’t be tied up by a brokerage failure like the one that felled Lehman Brothers Holdings Inc.
The team also will help mutual funds get access to hedge fund services such as financing, Michael Minikes, chief executive officer of JPMorgan Clearing Corp., the bank’s U.S. broker-dealer, said in an interview yesterday. The group will draw on resources of the New York-based bank’s prime brokerage and securities services units, he said.
West Palm Beach (HedgeCo.net) – The Hedge Fund Journal’s Funds of Hedge Funds GLOBAL50, produced in association with Newedge Prime Brokerage Group, reports that minus a few exceptions, funds were happy to participate in the survey and submitted their assets under management figures as at 30th June 2009, which goes some way to prove that funds are taking the issue of transparency more seriously. Those funds that declined to participate have been given estimates based on a variety of data and industry sources.
In responding to the survey, many funds wanted to emphasise that liquidity terms were often the key to how a firm had been able to retain assets, the Journal reports. Those funds with more generous liquidity terms believed, rightly, that they were victims of what is now aptly-called the ‘ATM effect’.
The data shows that between 30th September 2008 and 30th June 2009, over $200 billion was withdrawn from the top 50 funds. Most funds lost an average of between 25% – 30% of their assets under management. However, UBS Alternative and Quantitative Investments remains in pole position, despite losing over 33% of its assets: at 30th June, 2009 assets under management stood at $31.4 billion (down from $46.6 billion in September 2008).
The top 50 funds are certainly managing less, but they are not out of the game. Smaller funds, of course, are facing an even tougher time. Chicago-based Hedge Fund Research (HFR) has reported that over 200 funds of hedge funds liquidated in 2009. This is a significant increase on the last quarter and represents an annual attrition rate of over 8%; nearly double the previous record set in Q4 2008. Falling assets and rising costs due to heightened due diligence and compliance demands from investors will continue to have a strong impact on the business viability of smaller funds.
Hitting rock bottom
The crisis has raised some important questions. Having grown at more than 20% a year between 2000 and 2008, the reversal in fortunes has come as a shock to many within the industry. At their peak, assets under management for funds of hedge funds reached $825 billion according to HFR, but by the end of Q2 2009, assets in the sector had dropped to $530 billion. Importantly, that marked a $5 billion gain from 31st March 2009 and may indicate that redemptions have bottomed out.
But is the fund of hedge funds industry a victim of circumstance or is it a flawed business model? The connection between the Madoff scandal and the industry was unfortunate, if not unfair, (although, some notable funds of hedge funds had invested with Madoff) and as investors sought to retrieve money where possible, it was inevitable that funds of hedge funds would be called upon. “What we have seen is the latest phase of an evolutionary process,” says Permal’s Roberto Giuffrida, Senior Vice President, Regional Director Europe. “Since hedge funds first emerged 60 years ago, there have been three waves of growth and decline, and we are fully expecting to see the fourth wave of growth over the next few years.”
But without doubt there are weaknesses within the model. One major area of weakness is the asset liability mismatch. Funds of hedge funds have traditionally managed their portfolios with a mismatch between portfolio liquidity and terms offered to investors. In the event of a sudden rush of redemptions, funds had a credit facility to bridge the two. In reality, this system proved to be wholly unreliable. Funds were unable to meet the redemption requests and were forced to impose gates.
Adapt or die
Issues such as alignment between investors and managers in terms of fees and investment objectives as well as transparency and the due diligence process are also areas where practices are being reviewed and changed. In the current environment investors are able to affect changes and do not have to settle for second best.
But despite the recriminations, in relative terms, hedge fund investment held up well during the crisis. For example, in 2008 the Hennessee Hedge Fund Index and the Barclay Hedge Index fell 22.42% and 21.63% respectively, while the S&P 500 slid 38.49% and the NASDAQ plunged 40.54%. “The fact that hedge fund indices outperformed the long only indices proves that hedge funds offer the downside protection. And in 2009 we are seeing investor allocations into hedge funds and funds of hedge funds,” explains Optima Managing Director, Graham Martin.
Data clearly shows the rate of redemptions is slowing. They were lower during Q1 2009 than in Q4 2008 according to Standard and Poor’s and they were lower still in the second quarter of 2009. HFR notes that in the last year, funds of hedge funds have dropped fees by three basis points to 1.25%. There is also evidence which suggests that funds with lower management fees outperformed the funds with higher fees, although the data on this is fragmentary. What’s more, liquidity profiles are improving: funds have reduced leverage and many are showing positive cash balances.
Could this be the nadir for the industry? HFR, BNY Mellon and Casey Quirk believe so. Many managers and not a few studies are projecting that assets will grow further in the second half of this year. And regardless of the industry setbacks, funds of funds will continue to be a major channel into single manager hedge funds. But Craig Stevenson, Senior Investment Consultant, Watson Wyatt believes that while funds of hedge funds will stage a comeback, they will face increased competition from single manager funds. He attributes this to the fact that before the crisis, funds of funds could offer capacity to those funds that were closed. The current state of the industry means that single managers are looking to build their own portfolio of institutional assets and virtually all funds, even the most successful, are now open.
Clearly, investors who have less resources and alternative asset experience will continue to invest through funds of hedge funds. “Allocating to hedge funds is a good way of diversifying portfolios and with funds of funds on a base fee for the foreseeable future they are as cheap as they have ever been,” says Stevenson. The business model may indeed be more sound than was thought six months ago since with time investors will return. But some funds that stretched the goodwill of investors may find it is difficult to be fully forgiven.
You can access the Global 50 by clicking on the link below:
West Palm Beach (HedgeCo.net) – Deutsche Bank’s Alternative Fund Services, part of the bank’s Global Transaction Banking (GTB) division, has ranked second among top administrators in Global Custodian magazine’s 2009 Hedge Fund Administration Survey.
This is the first time Deutsche Bank has participated in the survey, which is published annually and includes responses from 1,370 clients of hedge fund administrators around the globe. It is intended to measure service quality and value in 12 categories including client service, fund accounting and middle office services, across a full range of fund characteristics such as size, strategy and location.
“In our first appearance in the Hedge Fund Administration Survey we are very pleased to have ranked second and scored highly in a range of categories,” said Christopher Nero, Managing Director and co-head of Alternative Fund Services within Global Transaction Banking.
In a write-up accompanying the results, Global Custodian commented, “(GTB) has a long pedigree in hedge fund administration too, with operations scattered across Cayman, Delaware, the Channel Islands, Dublin, Luxembourg, Mauritius and Singapore. But in January last year Deutsche transformed its presence in the industry by the acquisition of California based hedge fund administrator Hedgeworks. With staff in Boston and Cayman as well as the Golden State, Hedgeworks helped Deutsche double the size of its business. As it did for the prime brokerage business, the credit standing of the bank has attracted clients.”
Last month, Deutsche Bank announced that its Global Prime Finance business within its Global Markets division received 127 “Best in Class” and 16 “Top Rated and Commended” awards, the most among all global prime brokerage providers, in the Global Custodian 2009 Prime Brokerage Survey.
Alex Akesson
Editor for HedgeCo.net
alex@hedgeco.net
HedgeCo.Net is a premier hedge fund database and community for qualified and accredited investors only. Membership on www.hedgeco.net is FREE and EASY. We also offer FREE LISTINGS for Hedge Funds!
Earthtimes – Lighthouse Prime Services, a division of Lighthouse Financial and a leading prime brokerage services provider dedicated to the needs of emerging and newly established hedge funds and managed account platforms, announces its upcoming slate of events as part of Lighthouse Prime Services’ Capital Introduction Program. Based upon the success of recent Lighthouse Prime Services’ Investor Roundtable events that took place in Chicago and San Francisco,
Reuters – UBS has named Alastair Sclater to the new post of head of its Singapore prime brokerage, as the Swiss bank aims to build that business in Asia’s second-biggest centre for hedge funds.
Singapore, which competes with rival Asian financial centre Hong Kong, has attracted asset managers, private banks and hedge funds in recent years with tax incentives and strict secrecy rules.
The city-state also provides investors the opportunity to manage part of the more than $300 billion in assets held by its sovereign wealth funds GIC and Temasek.
HedgeCo.net (West Palm Beach) – Atlanta based hedge fund prime brokerage firm, NorthPoint Trading Partners, LLC, has opened an office in Dallas, Texas, led by industry veteran Chip Miller.
Miller joins NorthPoint from Stadium Capital where he was head trader for 4 years. He will head up both the prime brokerage and the sales trading operations in the region. Miller will report directly to Michael DeJarnette, President of NorthPoint.
“As we continue to expand our presence nationwide, we are very fortunate to have someone join our team who is as talented and experienced as Chip,” says Douglas Nelson, Chief Executive Officer of NorthPoint.
An industry veteran since 1993, Chip has held positions at Jefferies and Co., Clover Partners and Stadium Capital Management. He is experienced in the trading, operational and regulatory aspects of the buy and sell side.
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HedgeCo.net (West Palm Beach) – BTIG LLC. announced that it has expanded its Prime Brokerage group to offer fixed income services, including trading and portfolio financing. The expansion into fixed income is in conjunction with the launch of BTIG’s Global Fixed Income Group in February of this year, which focuses on sales and trading of credit products across the full credit spectrum from investment grade to distressed debt.
BTIG Prime Brokerage previously covered equity and equity options and made the move to fixed income to better meet the needs of its hedge fund clients in today’s market.
“As our clients became more interested in fixed income products, we saw a huge need and opportunity to expand our services,” Justin Press, Managing Director and Co-Head of Prime Brokerage, said. “We have created a one-of-a-kind fixed income offering that will bridge the gap for hedge fund managers who have traditionally been operating in equities only.”
BTIG’s Prime Brokerage clients also benefit from the firm’s full range of expertise and services, including Outsource Trading, Market Intelligence, International Trading, and access to the Equity Derivatives team, Capital Introduction team and Commission Management services. The Prime Brokerage group was launched in January 2004 and caters to start-up and existing long/short equity hedge funds. Prime Brokerage and middle office operations have a combined 40+ professionals.
The Global Fixed Income Group has added 50+ professionals since its launch earlier this year.
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